Weekly Technical Market Outlook 2/23/2015

It’s nice to see stocks finish on a strong note last week with traders preparing for Fed Watch 2015. While the S&P has been hitting new highs for the last several years its great to also have the other major equity indices participating as well, with the Dow Industrial, Nasdaq, Russell, and S&P 600 (small caps) all hitting multi-year highs. At a quick glance I believe one of the only major U.S. indices to still be under it’s prior high is the Dow Transports, but this index is still very close to breaking out.

In the last Technical Market Outlook I addressed the mult-month consolidation that was taking place in the S&P 500 ($SPX), noting the slight bias of higher lows that was taking place in breadth and momentum. Since then, equities have been able to break out as mentioned above and breadth has continued to confirm the advance. Momentum on the other hand remains in a bullish range but still has yet to confirm the recent new highs.

While I think the current trend looks health the short-term price action appears to be stretched at the moment. Volatility ($VIX) momentum has been pushed down quite a bit. I wouldn’t be surprised if we see some bumps in the near future that could push the $VIX higher. We’ll see.

However, of the five tools I use to gauge a market’s health at each new high, only two have yet to confirm the latest move in stocks. Most notably, the relationship between high yield bonds and Treasury debt. To put that in perspective, at the 2007 peak all five measurements diverged (did not hit a new high), in 2011 four of them did not confirm in April but since then we’ve seen a healthy number of data points show positive signs of market strength. While valuations/fundamentals appear to be stretched on a historical perspective, the price action and market itself still looks healthy on an intermediate/long-term basis.

Trend
After a two month consolidation stocks have broken out and continued their move to new highs. The up trend remains intact with the S&P 500 above both its short-term and intermediate-term moving average’s. I’ll be watching to see if price ‘respects’ the trend line connecting the higher highs since the last touch in December sent prices lower by a couple of percentage points.

trend

Breadth
After a minor divergence at the prior high in the S&P in December, the NYSE Common Stock Only Advance-Decline Line has reached a new high, confirming the recent rise in stocks. We’ve also had a breakout in the Percentage of Stocks Above Their 200-day Moving Average. This breadth measure is still attempting to break its series of lower highs after beginning to make a series of higher lows. From a breadth perspective, things appear to be healthy within the equity market.

breadth

Natural Gas
After declining nearly 45% since its November peak, a bullish divergence in momentum is taking place. The Relative Strength Index (RSI) made a higher low after spending some time under being ‘oversold’ under 30 as price made a lower low. Since then, as price has popped higher so has momentum with the RSI indicator break above its prior high before price has been able to. I view this as a positive and will be watching to see if $UNG is able to get back to its 2015 high near $17. JC Parets recently wrote a post on nat gas as well, citing some interesting points concerning sentiment.

ungMomentum
While Breadth has confirmed the recent high; moment has not, at least not yet. on both the daily and weekly chart momentum remains below its prior highs. The RSI indicator is currently testing it’s prior high set in December and while the MACD is above its respective December high, it’s still under the peak set in November. The Money Flow Index, which is one of the few indicators I watch based on its absolute level, is currently extended to the upside. While it’s use as a timing mechanism has an iffy track record, it’s still a measure of momentum I keep an eye on.

momentum

Dow Jones COT
Each week I check in on the Commitment of Traders (COT) charts. What’s great about COT data is it’s one of the only ways to actually see how traders are positioned. We are able to look under the hood of the futures and options market and see how much Commercial, Large, and Small traders are holding both long and short all kinds of commodity and financial markets.

The one set of COT data that stood out to me this week was for the Dow Jones Composite, specifically the Small Speculator Traders (red line). This trader group is made up of those often trading odd lots and can be a sign of individual trader sentiment. Last week we saw a decent size spike in the net-long position of the Small Speculators while the Commercial Traders (blue line) are shown to have been on the other side of that trade, with an increase in their net-short position. This is now the largest disparity since 2011, and the second largest net-long position since 2011 for Small Speculators.

Dow COT

60-Minute S&P 500
Checking in on the intraday chart of the S&P 500 we can see the up trend off the created support at 1990. With the early February test of this level of support we had a second bullish divergence in the RSI momentum indicator, sending stocks to an eventual new high. The slight drop last week was bought at the 50-1hr Moving Average but also is being accompanied by a bearish divergence in the MACD indicator.

60 min

Last Week’s Sector Performance
While last week was a shortened, traders appear to have shown preference for Health Care ($XLV), Industrials ($XLI), and Utilities ($XLU) as they were the strongest relative performing sectors for the week. Energy ($XLE), Financials, ($XLF) and Consumer Staples ($XLP) all under-performed the S&P last week.

last week sector

Year-to-Date Sector Performance
Materials ($XLB) and Health Care are the best performing sectors so far for 2015. While Utilities and Financials are the two worst performing sectors YTD.

YTD sector
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Brazilian Equities Begin to Show Signs of Recovering

While it seems investors have been very U.S.-focused it seems there are some interesting setups that are taking place in some country-specific ETFs. What I’d like to look at today is the iShares Brazil ETF ($EWZ). Brazil has fallen about 40% from its September 2014 high. With the down trend the 50-day Moving Average has acted as good resistance on counter-trend rallies. While at the same time Momentum (RSI indicator) remained in a bearish range as sellers continued to apply pressure to the downside.

However, recently there has been an interesting setup created in the latest price action for $EWZ. Earlier this month price tested the December low and bounced higher. At this test of the prior low the Relative Strength Index (RSI) put in a higher low. This bullish divergence is a good sign for Brazil bulls. What I’ll be looking for next is to break out of the resistance near 58 on the RSI as a positive sign that momentum is strengthening.

The On Balance Volume (OBV) indicator also put in a positive divergence. This volume indicator simply adds and subtracts the number of shares traded based on whether that day’s price action was positive or negative. We can see that fewer shares were traded on the downside as price fell to test that Dec. level, meaning there was potentially less interest by traders to push shares lower during this re-test.

As price approaches it’s 50-day MA and it’s declining trend line, this could be a place for price to do battle. Bulls will want to push $EWZ above this trend line as well as the Moving Average and hopefully get a test and a break of the prior lower low of $38.

I’ll be watching the price action in Brazil and see if momentum and price are able to show some constructive signs in ending the current down trend.

Brazil

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

How I Measure Breadth & What It Says for Equities Right Now

On Wednesday I had a conversation with Urban Carmel and Jesse Felder about breadth. Urban and Jesse are both great follows on Twitter and write must-read blogs. Urban recently wrote a post about breadth divergences being noise. He showed a couple of charts of the Percentage of Stocks Above Their 50-day and 200-Day Moving Averages. While this is one way to measure breadth I don’t think it’s the most accurate and to Urban’s point, it can often be just noise. However, In my opinion not all measures of breadth are created equal and I wanted to show my preferred method…

Every couple of weeks I wrote a post titled Weekly Market Technical Outlook in which I show many of the same charts with updated analysis and commentary. One of those charts is of market breadth, specifically the Advance-Decline Line and the Percentage of Stocks Above Their 200-day Moving Average. As Urban pointed out, there can be quite a bit of whipsawing in the breadth measure involving the Moving Average. However, my preferred (and often discussed) way of looking at breadth is through the Advance-Decline Line.

The Advance-Decline Line is simply a cumulative number of the daily net number of stocks rising or falling. If more securities on a specified index were up one day then the A-D Line rises, and the oppose occurs when more securities decline. Now there are different versions of the A-D Line, the most commonly mentioned version looks at all traded securities on the New York Stock Exchange (NYSE). The issue with using this version is it gets muddled up with non-equity securities. This is why I prefer to look at just the Common Stock Only Advance-Decline Line for the NYSE as well as the S&P 500 A-D Line.

Both of these breadth indicators are shown on the chart below along with the S&P 500 index itself in the top panel. Since 2006 we have had just one negative divergence in the S&P 500 A-D Line and two negative divergences in the Common Stock Only version. A negative divergence occurs when an Index like the S&P 500 makes a higher high in price but this price action does not get confirmed by the indicator, as it makes a lower high. We saw this happen in 2007 in both of these measures of breadth and most recently momentarily in just the Common Stock Only A-D Line.

Breadth 07-15

Market peaks in an index are often led by the degradation of the underlying securities of the index itself. Many stocks are likely to already be in a bear market before the S&P 500 puts in its final peak. Is it possible to still have periods of increased volatility without a bearish divergence in breadth? Of course. We saw examples of that in 2010, 2011, and 2012. But none of these led to bear markets or protracted down turns.

No indicator or set of data is perfect and nothing acts as a crystal ball for the market. However, by understanding and using tools like breadth, we are able to have a better understanding of the ‘health’ of a market. Currently, we have both versions of the Advance-Decline Line tracking with the S&P 500 and are not showing warning signs of a protracted market decline. The bulls appear to still be in control.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.